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Book Keeping & Accountancy of 17

Sanjay Patel : +91 96246 69492 : [email protected] 201, Vasundhara Apartment, Opposite M K High School, Alkapuri, Vadodara, Gujarat, India

(please ignore typographical or grammatical or other error, if any)

Syllabus

1 The meaning and objects of Book Keeping, Double Entry Book Keeping.

2 Books of Prime Entry and Subsidiary Books: Cash Book, Bank Book, Journal, Ledger,

Purchase and Sale Books, Debit and Credit Notes Register, Writing of Books, Posting

and Closing of Accounts

3 Trading Account, Profit and Loss Account, Income and Expenditure Account

4 Preparation of Balance Sheet for Individuals and Companies and Disclosure

Requirements

5 Cost, Costing and Elements of Cost, Fixed Expenses, Variable Expenses, Break-Even

Point




1 The meaning & objects of Book Keeping

Book Keeping

Book Keeping is involved in the recording of transactions

It is the systematic recording and classification of financial data of an

organization in an orderly manner

It is to show correct position regarding each head of income and expenditure as

well as assets and liabilities

It is essentially a record-keeping function done to assist in the process of

accounting

It is preliminary step of ‘Book of Account’

It is actually a recording function & the analysis is done during accounting

Objectives of Book Keeping

To keep a complete and accurate record of all the financial transactions in a

systematic orderly, logical manner.

To ensures that the financial effects of these transactions are reflected in the

books of accounts

To ascertain the overall effect of all recorded transactions on the final statement

of the company

To measure all financial transactions in monetary value

To record all financial transactions in the books of prime entry in chronological

order

To record all financial transactions by classifying them as personal, real and

nominal account

To keep all records of financial transactions permanently for future reference

To summarize the cumulative effect of all economic transactions of business for a

given period by maintaining permanent record of each business transaction with

its evidence and financial effects on accounting variable

Importance and advantages of Book Keeping

It helps to ascertain the profit and loss of the business

It helps to provide financial information and data for the purpose of cost

ascertainment.

It helps to provide financial information for planning, budgeting and forecasting.

It helps to know the true and correct financial position of the business at any time

It helps to provide information to ascertain tax liability

It records all financial transactions systematically and chronologically so it is




detect frauds and errors

It is helpful to Present the financial information to business owners and other

stake holders

“Book Keeping involves journal, ledger, cash book and other subsidiary books, it cannot disclose the

results of Business.”

“Accounting is process of identifying, measuring, recording, classifying, summarizing and

communicating the financial information to the users.”

Double Entry Book Keeping

Double-entry book keeping (or double-entry accounting) means that every

transaction will result in entries in two accounts.

A minimum of one amount will be a debit (entered on the left side of the account)

and at least one amount must be a credit (entered on the right side of the account)

Every transaction must have the total of the debits equal to the total of the credits

Example

Let’s assume that a person invests Rs. 100,000 in exchange for 10,000 shares of the

common stock of a new corporation.

The corporation will debit the asset account Cash for Rs. 100,000 and will credit the

stockholders’ equity account Common Stock for Rs. 100,000.

In the double-entry accounting system, each accounting entry records related

pairs of financial transactions for asset, liability, income, expense, or capital

accounts

Recording of a debit amount to one or more accounts and an equal credit amount

to one or more accounts results in total debits being equal to total credits for all

accounts in the general ledger

Accounting entries that debit and credit related accounts typically include the

same date and identifying code in both accounts, so that in case of error, each

debit and credit can be traced back to a journal and transaction source document,

thus preserving an audit trail




2 Books of Prime Entry and Subsidiary Books

Source document

Business transactions are recorded in the books of accounts on the basis of some written

evidence called source document.

Common Source documents are Cash Memo, Invoice or Bill, Receipts, Debit Note,

Credit Note, Cheque, Pay in slip etc.

Voucher

Documentary evidence in support of the transaction is known as voucher.

Journal

Journal is a book of prime entry in which transactions are copied in order of date from a

memorandum or waste book.

Steps of Accounting Cycle

Classification of Books

Book of Prime Entry – Journal

A journal is often referred to as Book of Prime Entry or the book of original

entry.

Recording of Transaction

Journal Ledger Trial Balance

Adjustment Entries

Adjusted Trial Balance

Closing Entries Financial Statement




In this book transactions are recorded in their chronological order

The process of recording transaction in a journal is called as ‘Journalisation’

The entry made in this book is called a ‘journal entry’

Functions of Journal

Analytical Function

Each transaction is analyzed into the debit aspect and the credit aspect. This helps

to find out how each transaction will financially affect the business

Recording Function

Accountancy is a business language which helps to record the transactions based

on the principles. Each such recording entry is supported by a narration, which

explain, the transaction in simple language

Historical Function

It contains a chronological record of the transactions for future references

General Journal

This is a book of chronological record of transactions

This book records those transactions which occur so infrequently that they do not

warrant the setting up of special journals

Subsidiary Books

Subsidiary Books refers to books meant for specific transactions of similar nature.

Subsidiary Books are also known as Special journals or day books. To overcome

shortcoming of the use of the journal only as a book of original entry, the journal is

subdivided into specific journals or subsidiary books.

Cash Book

It is a special journal which is used for recording all cash receipts and all cash

payments

It is a book of original entry since transactions are recorded for the first time from

the source documents

On the debit side, all cash receipts are recorded while on the credit side, all cash

payments are recorded

In case of cash transactions, only a single aspect of transactions is recorded in

ledger because the other aspect has to be recorded in Cash Book

It is both a journal and a ledger

Type of Cash Book

1. Single Column Cash Book




2. Double Column Cash Book

3. Triple Column Cash Book

Purchase Day Book

The purchase day book records the transactions related to credit purchase of

goods only

It follows that any cash purchase or purchase of things other than goods is not

recorded in the purchase day book

Periodically, the totals of Purchase day book are posted to Purchase account in

the ledger

Sales Day Book

The sales day book records transaction of credit sale of goods to customers

Sale of other things, even on credit, will not be entered in the sales day book but

will be entered in Journal Proper

If goods are sold for cash, it will be entered in cash book

Total of sales day book is periodically posted to sales account in the ledger

Return Inward Book

The transactions relating to goods which are returned by the customers for

various reasons, such as not according to sample, or not up to the mark etc

contain in this book

Return Outward Book

This book contains the transactions relating to goods that are returned by us to our

creditors e.g. goods broken in transit, not according to the sample etc.

Bills Receivable Book

It is such a book where all bills received are recorded and therefore posted

directly to the credit of the respective customer’s account

The total amounts of the bills so received during the period (either at the end of

the week or month) is to be posted in one sum to the debit of Bills Receivable

A/c.

Bills Payable Book

All the particulars relating to bills accepted are recorded and therefore posted

directly to the debit of the respective creditor’s account.

The total amounts of the bills so accepted during the period (either at the end of

the week or month) is to be posted in one sum to the credit of Bills Payable

Account.

Journal Proper




Journal Proper is a residuary book in which those transactions are recorded which

cannot be recorded in any other subsidiary book

The various examples of transactions entered in a Journal Proper are Opening

entry, Closing entries, Transfer entries, Adjusting entries, Rectifying entries &

other misc. entries.

Ledger

The Ledger is the main or principal book of accounts in which all the business

transactions would ultimately find their place under various accounts in a duly classified

form.

After recording the business transaction in the journal or special purpose subsidiary

books, the next step is to transfer the entries to the respective accounts in the ledger.

Ledger Accounts

The book which contains accounts is known as the ledger

Finding information pertaining to the financial position of a business emerges

only from the accounts

The ledger is also called the Principal Book or Book of Final Entry

All the necessary information relating to any account is available from the ledger

Posting

Posting means transferring the debit and credit items from the Journal to their respective

accounts in the ledger.

Ledger Posting

As and when the transaction takes place, it is recorded in the journal in the form

of journal entry. This entry is posted again in the respective ledger accounts under

double entry principle from the journal

Posting to Ledger Accounts from Subsidiary Books

There is a ledger account e.g. for purchase book, there is Purchase Account, for

sales book there’s Sales A/c, for cash book there will be Cash A/c as well as Bank

A/c and so on

Classification of Ledger




Personal Ledger

The ledger where the details of all transactions about the persons who are related

to the accounting unit, are recorded

Debtors’ Ledger

The ledger where the details of transactions about the persons to whom goods are

sold, cash is received, etc. are recorded

Creditors’ Ledger

The ledger where the details of transactions about the persons from whom are

purchase goods on credit, pay to them etc. are recorded

Impersonal Ledger

The ledger where details of all transactions about assets, incomes & expenses etc.

are recorded

Cash Book

The Book where all cash & bank transactions are recorded

General Ledger

The ledger where all transactions relating to real accounts, nominal accounts,

details of debtors’ ledger and creditors’ ledger are recorded

Nominal Ledger

The ledger where all transactions relating to incomes and expenses are recorded

Private Ledger

The ledger where all transactions relating to assets and liabilities are recorded

Trial Balance

Trial Balance is the list of debit and credit balances taken out from ledger and it




also includes the balances of cash and bank taken from the cash book

When posting of all the transactions into the Ledger is completed and accounts

are balanced off, then the balance of each account is put on a list called Trial

Balance

Functions of Trial Balance

It helps in ascertaining the arithmetical accuracy of ledger accounts

Helps in locating errors

Provides the summary of Ledger A/c’s

Helps in the preparation of Final A/c’s

Bank Book

When an individual or a firm deposits any money into a bank or withdraw money

by issuing a cheque from a bank, he/it records the transaction in the debit side of

the bank columns of the Cash Book for such deposits and credit side of the

bank column of the Cash book for such withdrawals

On the other hand, bank also records such transactions in its book i.e. credit such

account for deposits and debit such account for any withdrawals.

The Bank issues a book to the account holder after recording such transactions.

The book which is prepared by the bank for accountholder is known as Pass

Book.

Purchase Book

Purchases book is destined for recording the purchase of goods on credit only

Cash purchases are not recorded in this book

Entries in the purchases book are made from the invoices received from the

suppliers. Posting is done in the supplier’s/ creditors account daily from the

purchases book with their respective amounts

At the end of week/month, the total of the purchases book is debited to the

purchases account in the ledger

Sale Book

In the Sales Book, only credit sale of goods are recorded

It is prepared on the basis of copies of invoice sent to customers

To post sales book, the accounts of the customers are individually debited with

respective amounts at the end of every month

Sales Account is credited with the monthly total of the Sales Book

Cash Sales will be entered in the Cash Book; credit sale of various assets or




investments will be recorded in General Journal

Debit and Credit Notes Register

Debit Note

When the goods are returned to the suppliers, an intimation is sent to them

through what is known as a debit note

These debit notes serve as vouchers for these entries

It is a statement sent by a businessman to another person, showing the amount

debited to the account of the later

It is usually serially numbered and are prepared in the same form as that of the

invoice

Credit Note

Customers who return goods should be sent a credit note

It is a statement sent by a business to another person showing the amount credited

to the account of the later

Credit notes are serially numbered and are similar in form to the invoices

Credit notes issued to customers are vouchers for the entries appearing in the

sales returns book

GST Law has however provided them a legal recognition as a document on which tax incidence can be

passed or excess tax can be refunded or credited back. Section 34 of CGST Act, 2017 details out the

provisions on debit note and credit note.

Personal Accounts

Debit the receiver and credit the giver

If you purchase goods from Ram on credit, the two accounts involved are Goods

(Purchase) Account and Ram’s Account.

Ram is the giver in this transaction, his account will be credited

If cash is paid to Ram, Ram’s Account will be debited since he is the receiver




Real Accounts

Debit what comes in and credit what goes out

For example, where furniture is purchased for cash, furniture account is debited

while cash account is credited

Nominal Accounts

Debit all expenses and losses and credit all incomes and gains

For example, if firm/business pays salary to its clerk, the two accounts involved

are salary account and cash account

Salary account is a nominal account

Salary paid is an expense of the business and therefore this account will be

debited

Similarly if interest is received, interest account will be credited, since interest is

an income item

Rules

Assets Accounts: debit increases in assets and credit decreases in assets

Capital Account: credit increases in capital and debit decreases in capital

Liabilities Accounts: credit increases in liabilities and debit decreases in liabilities

Revenues or Incomes Accounts: credit increases in incomes and gains and debit

decreases in incomes and gains

Expenses or Losses Accounts: debit increases in expenses and losses and credit

decreases in expenses and losses




3 Trading Account, Profit and Loss Account, Income and Expenditure Account

Trading Account

It is the first part of income statement which is prepared to ascertain the gross

profit or gross loss for a given accounting period

It is prepared before the preparation of profit & loss account

It shows the result of trading activities relating to purchases & sales of goods &

services

It is prepared to calculate separately the profit from sale & purchase transactions

only

The profit or loss is termed as gross profit or gross loss as various other expenses

of an organization like administrative, selling & distribution and maintenance

expenses etc. are not deducted

Only the direct expenses which are incurred to bring goods into saleable

condition like freight, insurance, carriage inwards, fuel, power, royalties on

production, consumption of stores etc. are taken into account to calculate gross

profit/loss

Gross Profit = Net Sales – Cost of the Goods Sold

Gross Loss = Cost of the Goods Sold – Sales

Net Sales = Total Sales – Sales Returns (Return Inwards)

Cost of goods sold = Opening stock of goods + net purchases - closing stock of goods

at the end + all direct expenses

Net Purchases = Total Purchases – Purchases Returns (Returns Inwards)

Important points regarding trading account are Stock, Purchases, Direct

Expenses like Carriage Inward, Freight and insurance, Wages, Fuel, Power and Lighting Expenses,

taxes, Packing Charges, Manufacturing Expenses, Royalties & Sales

Profit & Loss Account

It is prepared to calculate the net profit or loss of the business for a given

accounting period

The balance of Trading Account i.e. gross profit or gross loss is transferred to the

Profit and Loss Account which is the starting point of the preparation of this

account

Thereafter, all those expenses and losses which have not been debited already to

the Trading Account are debited to the Profit and Loss Account

Other incomes and gains, if any, are credited to this account, e.g. interest earned

or commission received etc.

Net profit increases the capital whereas net loss decreases the capital




Net profit = Total Revenues – Total Expenses

Net Loss = Total Expenses – Total Revenues

Important points in Profit and Loss account are Selling and Distribution

Expenses, Management Expenses, Maintenance Expenses, Financial Expenses,

Abnormal Losses, Gross Profit, Other Income, Non-trading Income and

Abnormal Gains

Trading Account Profit & Loss Account

It is prepared to calculate the gross profit

(loss) for a particular period

It is prepared to arrive at the net profit

(loss)

In trading account, cost of goods sold,

sales and direct expenses are accounted

In profit and loss account, indirect

expenses, such as administrative expenses,

selling expenses, etc, are charged against

the gross profit and other revenues

The result of trading account i.e. gross

profit (loss) is transferred to profit and loss

account

The balance in profit and loss account i.e.

net profit (loss) is transferred to capital

account which will be shown in the

balance sheet

Income and Expenditure Account

It is equivalent to the Profit and Loss Account of a business enterprise

It is an account which is widely adopted by non-profit making concerns

It is prepared by following accrual principle

Only items of revenue nature pertaining to the period of account are included

therein

It requires adjustment in relevant accounts of outstanding items of income and

expenditure as also exclusion of amounts paid in advance before these are

included in Income and Expenditure Account.

Non-profit organizations registered under section 25 of the Companies Act, 1956 are required to

prepare their Income and Expenditure account and Balance Sheet as per the revised Schedule VI to the

Companies Act, 1956

Features

It is a revenue account prepared at the end of the financial period for finding out

the surplus or deficit of that period

It is prepared by matching expenses against the revenue of that period concerned

Both cash and non-cash items, such as depreciation, are taken into consideration

All capital expenditures and incomes are excluded

Only current years’ income and expenses are considered




4 Balance Sheet

It is a statement which shows the financial position i.e. the balances of assets,

liabilities and capital, of a business entity at a given date

It is prepared from the real accounts and personal accounts of trial balance

A debit balance in a real account or personal account represents an asset

A credit balance in a personal account represents a liability

There can be some newly opened accounts as well on account of adjustment

entries

The assets and liabilities are arranged in a proper way and the resultant statement

is the balance sheet

On the right hand side, assets are arranged while on the left hand side, liabilities

are recorded

The totals of the two sides of the balance sheet must agree because of the equation

Assets = Liabilities + Capital

Features of Balance Sheet

The primary objective of the preparation of balance sheet is to ascertain the

financial position of a concern

It shows (a) the nature and value of assets, (b) the nature and value of liabilities

and (c) the position of capital

Balance sheet is always prepared on a certain date, never for a particular period

Balance sheet, unlike a trading and profit and loss account, is not an account

It is a statement containing information regarding assets, liabilities and capital

Balance Sheet has the following sections

Assets: Current assets, Long-term investments, Property, plant and equipment & Other

assets

Liabilities: Current liabilities, Noncurrent liabilities, Deferred credits

Stockholders’ Equity: Paid-in capital, Retained earnings, Treasury stock (if any)

Income statement

It is also referred to as the statement of earnings, statement of operations,

statement of income, and profit and loss statement

It reports the revenues and expenses occurring during the accounting period

It will report a company’s operating revenues, other revenues (non-operating and

gains), operating expenses, other expenses (non-operating and losses)

multiple-step income statements




Sales

Less: Cost of goods sold

Gross profit

Less: Selling, general & admin expenses

Operating profit

Add: Other income

Earnings before tax

Less: Income tax expense

Net earnings

Statement of Cash Flows

The statement of cash flows (or cash flow statement) summarizes how a company’s cash

and cash equivalents have changed during the same period of time as the company’s

income statement

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities




5 Cost and Elements of Cost & Break-Even Point

Cost

It is a measurement, in monetary terms, of resources used for some purpose

The resources may be tangible (material or machinery) or intangible (wages,

power, time spent)

The use of resources is implicit in the term ‘Cost’ and commonly understood

‘Cost’ is expenditure incurred for creation of a value

Costing

It is defined as the technique and process of ascertaining cost

The cost may have to be ascertained for a product or service or a department or

any activity carried out by the business

It denotes accumulating all such expenses incurred for producing a product or

rendering a service or carrying out business activity

These expenses are mainly in the form of material, labor and other expenses

Element of Cost

Material Cost, Employee Cost, Direct Expenses, Utilities, Repairs & Maintenance Cost,

Production Overheads, Administrative Overheads, Selling and Distribution Overheads,

Interest and Finance Charges,

Classification of Costs

Based on Nature of Expense - Element

Material Costs are costs of physical commodities used to make a final product. The




material could be basic raw material, components, consumables, spares, packing material

etc.

Labor Costs comprise of expenses in relation to salaries, wages, bonuses, expenses on

staff welfare, statutory benefits like provident fund, gratuity etc.

Other Expenses are incurred either to provide support to manufacturing or service

activity or to ensure smooth running of business.

Based on traceability to cost object

Direct Costs are costs that can be easily identified with the unit of output. The direct costs

could be direct material costs, direct labor costs or direct expenses. The Direct Costs

(material plus labor plus expenses) together make a Prime Cost.

Indirect Costs are those which are not easily directly connected with the cost unit or cost

centre. All indirect costs together are termed as ‘Overheads’.

Based on behavioral of cost

Fixed Costs are those cost which do not change with change in the level of activity within

the relevant range (installed capacity). An interesting aspect about fixed costs is that while

the total fixed costs remain constant, per unit fixed cost will go on decreasing. If

production goes up it is clear that this concept helps management to understand the

importance of capacity utilization.

Variable Costs are costs that vary in direct proportion to the level of output. Any increase

in the production volume will result in corresponding increase in these costs. Thus total

variable costs will increase exactly in the same proportion of the volume of activity. The

most common examples of such cost are material costs and costs of labor directly working

on production. An interesting aspect about variable costs is that while total variable cost

changes with production level, per unit cost remains the same.

Semi Variable Costs are those which change with change in activity level but not in the

same proportion. In practice, the line of demarcation between fixed and variable is so thin

that most of the cost items fall under this category.

Break-Even Point

Break-Even Point reveals the quantity or volume of sales at which no profit or no loss is

made i.e., total cost is equal to total selling price or where contribution is equal to fixed

cost.

If the production is increased beyond this level, there will be profit and vice-versa.

The break-even point may be expressed in two ways:

1) BEP = Fixed Cost / Contribution per unit

2) BEP = Fixed Cost / PV Ratio

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